Global minimum tax (OECD Pillar 2) readiness explained

The Organization for Economic Co-Operation and Development (OECD) proposed Pillar 2 in 2021. This would establish a new global minimum tax rate of 15% for qualifying multinationals.

But where did this shift come from? Who exactly is impacted by it? The implementation of Pillar 2—also known as BEPS 2.0—may prompt questions among your team. But with this article, we’ll break down the Pillar 2 summary clearly to get your business up to speed.

What is OECD Pillar 2?

This OECD global minimum tax deal came to fruition after preceding proposals provided only a partial or temporary standard across the multinational corporate space. Examples of previous efforts include the Base Erosion and Profit Shifting (BEPS) project and Digital Services Tax (DST).

Often, in parts of the EU, Pillar 2 is thought to be interchangeable with the Internal Capital Adequacy Risk Assessment (ICAAP). However, the ICAAP is simply an assessment step certain industries are urged to complete as a part of Pillar 2 and the Basel Framework.

What is the objective of Pillar 2 OECD?

Pillar 2 aims to create an even playing field for global minimum tax applied to multinationals. The world’s largest organizations have historically had different domestic laws for corporate tax, which complicates multinational investments, tax planning, and more.

Pillar 2 introduces a 15% global minimum tax to simplify the rules and the economic “race to the bottom.”

When does Pillar 2 come into effect?

Pillar 2 was established in 2023 and should come into effect at the beginning of 2024—as per OECD recommendation. This will exclude the Undertaxed Payments Rule (UTPR) which will further delay the effects until 2025.

The individual countries that have signed on to enact Pillar 2 may have different implementation timelines. We’ll break down the current Pillar 2 statuses further in the article, but many are expected to be aligned with the OECD-recommended timeline.

Who does Pillar 2 affect?

The Pillar 2 tax affects large multinational corporations. Companies affected by Pillar 2 have a minimum of USD 991.9 million in revenue, and they must have reached that threshold in at least two of the last four fiscal years.

So far, over 140 countries have agreed to adopt Pillar 2, making for a more unified tax process.

How will Pillar 2 affect companies?

Pillar 2 will have a substantial impact on companies and operations. A few key things to be aware of in the adoption process include:

• Tax planning limitations
• Tax rate increases on cross-border investments
• Tax rate increases on earnings in low-tax jurisdictions
• Discouraging Foreign Direct Investment (FDI)
• Adding increased tax complexity
• Influencing where companies invest and attract talent
• Slowing economic growth globally

These implications may seem daunting, but understanding them is the first step toward Pillar 2 readiness.

What is the two-pillar solution?

The OECD has evolved to produce a two-pillar strategy to provide a permanent plan to solidify the global minimum tax. Here’s how their two-pillar solution works.

Pillar 1 is a combination of proposals to standardize tax allocation rules for multinationals. Pillar 1 takes a portion of residual profit and applies a tax to it based on the jurisdiction where the associated revenue is generated.

Pillar 2 establishes a minimum income tax rate for large multinationals with substantial economic footprints. This 15% minimum helps to increase tax certainty, and there are stringent rules and processes attached to ensure the tax is paid.

What is Pillar 2 safe harbours?

Pillar 2 safe harbour provisions requires organizations to be able to do Country-to-Country reporting to properly measure tax implications. The difference is that safe habour conditions involve less extensive calculations and use a smaller segment of data that is already available.

How finance and tax teams can prepare for Pillar 2

Develop a roadmap

Creating a roadmap is the best way to save time, stay on track, and provide the whole team with status visibility when implementing company-wide changes.

A few key milestones to keep in mind for your Pillar 2 roadmap may include:

• Adjustments to your legal structure
• Updates to your business model
• Contracting and transfer pricing adjustments
• Updated accounting processes
• Profit and systems & data changes
• Organizational tax function adjustments

Assess your operational readiness

In conjunction with building your roadmap, check in with affected departments to assess operational readiness.

Identifying key stakeholders and determining their available budget and resources to proceed with the roadmap will be key. A faster closing assessment is also a great way to assess your operations.

Develop a data strategy to make tax compliance easier

It’s important to thoroughly assess your data processes to identify gaps and build out a revised data strategy.

Having a variety of data sources makes harmonizing processes challenging, so getting data owners aligned as early as possible will keep your teams on top of the implementation.

Perform a qualitative impact assessment to ascertain Pillar 2 implications for your business

Given that Pillar 2 implementation will be a significant time investment for your team, early consideration of every area will be crucial for preserving compliance and shareholder value.

Performing a Qualitative Impact Assessment to define the implications for your business is ideal. For countries with zero tax, a CIT readiness project is also recommended.

How the Pillar 2 global minimum tax will work

The Income Inclusion Rule

The Income Inclusion Rule (IIR) is the primary taxing rule for Pillar 2. Put simply, the jurisdiction where the corporation operates will impose a tax to account for any shortfall between the global minimum tax rate and the domestic tax rate.

It’s important to note that if a jurisdiction applies for a Qualified Domestic Minimum Top-Up Tax (QDMTT), it will enable the jurisdiction to collect the tax itself, as it takes priority over an IIR.

The Undertaxed Payments Rule

The Undertaxed Payments Rule (UTPR) works as a reinforcement so if not all top-up tax is allocated to an IIR, the liability and accountability for the top-up tax falls under the jurisdiction where the constituent entities are operating.

Corporations can account for tax under the UTPR with the denial of deduction method or alternate equivalent adjustments.

The Subject To Tax Rule

Fundamentally different from the IIR and UTPR, the Subject To Tax Rule (STTR) takes priority over both.

The STTR could apply regardless of the corporate size or revenue threshold. It’s a treaty-based rule that can be requested by either party to a treaty and is bilaterally enacted. Regions traditionally called “developing countries” will likely make up the majority of areas requesting an STTR.

Is anybody excluded from the global minimum tax?

A few particular industries are to be excluded from Pillar 2. Exclusions include:

• Government entities
• International organizations
• Non-profit organizations
• Pension Funds
• Investment Funds or Real Estate Investment Vehicles that are unreimbursed partnership expenses of the qualifying multinationals

Pillar 2 status around the world

As Pillar 2 implementation spreads globally, it’s important to keep track of the progress of the areas that impact your business. Here are the current statuses of the following key jurisdictions.

Asia

China and Mongolia specifically have not publicly indicated a status regarding Pillar 2. However, many countries in Asia, including Japan, South Korea, Vietnam, and many others are in the final stages of implementation.

For Pillar 2 statuses regarding a specific country in Asia, try out an online Pillar 2 status tracker. PwC has a tracker with reliable, updated information.

Canada

The Canadian government proposed legislation regarding Pillar 2 in August of 2023. An IIR and a QDMTT will apply to Canadian-qualifying multinational groups and will come into effect for fiscal years on or after December 31, 2023.

European Union

The EU is made up of three jurisdictional pillars:

• The European Communities.
• The Common Foreign and Security Policy (CFSP).
• And the Cooperation in the Field Of Justice and Home Affairs (JHI)

The EU and these three pillars have been early adopters of Pillar 2, with a commitment to bring the law into effect within states by the end of 2023. There may be varying times and types of implementation between EU states, but broadly, Pillar 2 is already in effect in the EU.

United Kingdom

The United Kingdom, in particular, has enacted Pillar 2 as of July 2023. With it, the UK has introduced an IIR, as well as a DTT as a part of their 2023 Finance Act.

United States of America

Pillar 2 has been a hot topic in the United States, as the country has not made a public announcement regarding its implementation. The Defending American Jobs and Investment Act was introduced in May of 2023. This act increases income tax and withholding tax rates between 5%-20% on certain foreign partnerships.

It is said, however, that the United States Treasury Department is actively discussing with member nations to help facilitate Pillar 2.

Be prepared for OECD Pillar 2 with Prophix

Preparing for the rollout of Pillar 2 and identifying impacts on your business can be daunting. Assessing your readiness, identifying key stakeholders, and producing an implementation plan are complex, time-consuming initiatives.

Luckily, Prophix is here to help. With a vast network of partners and over 3,000 customers worldwide, we’re committed to being a trusted resource for your business. Prophix’s Financial Performance Platform is what your business needs to navigate these changes.

Want to see how? Chat with an expert to learn more.